The Day Ahead: Wall St research versus PR

Can you take research at face value? Or is it just a regurgitation of PR spiel?
Written by Larry Dignan, Contributor

Commentary: Don't fear for Wall Street analysts in a bear market -- there's always public relations.

Any remaining doubt that many sell-side analysts are merely company mouthpieces should have evaporated after reading a few research reports about Transmeta Monday. Did any of the underwriter analysts do anything besides read Transmeta's press releases?

Readers of this column know the game by now. A company goes public and 25 days later analysts from the underwriting firms start coverage with "buy" ratings. Why? They're paid to say nice things. I've also seen many research reports that looked like they've been crafted by the companies themselves.

But nothing like this. I have a hunch Transmeta may have penned the research reports for underwriters Morgan Stanley Dean Witter, Deutsche Banc Alex. Brown and SG Cowen. The alleged Transmeta research reports neglected to mention a few issues that would concern investors.

On the day before Transmeta's IPO, Compaq, an investor in the company, announced it wouldn't be using Crusoe. IBM, which manufacturers Transmeta chips, also opted for Intel chips over Transmeta. Last week, NEC said it was going to recall of 300 notebook computers because of defective Transmeta chips.

Transmeta supporters might say the Compaq, IBM and NEC items were overblown, but they deserve at least a mention. Isn't it notable when your main partners don't use your products?

Only one analyst -- Morgan Stanley's Mark Edelstone -- mentioned one of Transmeta's recent problems. Under a heading of "Normal risks associated with the launch of a new processor", Edelstone noted the NEC flap. Apparently, the Compaq and IBM issues didn't make the cut.

But let's give Edelstone credit -- at least he mentioned NEC. Other analysts didn't. However, analysts did spew a lot of tidbits that came straight from Transmeta's Web site.

Some evidence to ponder:

  • Transmeta's Web site: Transmeta has pioneered a revolutionary new approach to microprocessor design.

  • SG Cowen analyst Drew Peck: Transmeta has developed a revolutionary new microprocessor (Crusoe) with performance similar to Intel's mobile processors, but with dramatically lower power consumption.
  • Transmeta's Web site: Transmeta's software translates blocks of x86 instructions once, saving the resulting translation in a translation cache. The next time the (now translated) code is executed, the system skips the translation step and directly executes the existing optimised translation at full speed.
  • DB Alex Brown's Erika Klauer: Transmeta's software translates instructions only once, saving the resulting translation in a translation cache. The next time the now translated x86 code is executed the system skips the translation step and directly executes the existing optimised translation.
  • You get the idea. And it wasn't just the underwriters that couldn't stop glowing. The common theme was that the PC market is dead, long live Transmeta. Where's the healthy scepticism?

    Brian Alger, an analyst at Pacific Growth Equities, was quick to call Transmeta the "next Intel".

    "While we have seen the numerous press clippings documenting a battle between David [Transmeta] and Goliath [Intel], we believe there is much more to Transmeta than yet another competitor to take on Intel," said Alger.

    "If we look back ten or 20 years and ask ourselves which stocks we would invest in, we would have to place Intel and Microsoft at or near the top. Transmeta has been positioned as the first company in a great while to have the potential to be the next Intel."

    Can't wait to call Alger on that one in a few years.

    Just in time for the end of Transmeta's quiet period, Validea, an analyst tracking firm, perused its database of 4,000 analysts and came up with some not-so-shocking conclusions.

    Buy-side analysts' stock picks beat sell-side stock picks by a wide margin. Stock picks made in the media by the buy-side managers had a return of 7.7 percent in the three months after their public selection. In contrast, picks made by sell-side analysts averaged a return of just 0.9 percent in the three months following their selection, said Validea.

    Those findings make a lot of sense. For starters, buy-side folks have more to lose. Buy-siders actually own stocks, not just push them on investors. In addition, buy-side guys don't have investment bankers to support.

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